3 reasons to buy Glencore shares today

Glencore (LSE: GLEN) shares among the best players in the FTSE 100 now, up 22% in the past 12 months. The price has been very volatile for a long time, though. And that highlights the cyclical nature of the mining sector.

Still, even though its value has more than quadrupled since its early 2020 highs, Glencore is only worth a modest headline. Estimates suggest a price-to-earnings (P/E) ratio of just around four. When a company in a cyclical sector approaches a high point in the earnings cycle, the P/E can look less than normal. But that seems too low for me.

Dividends

Glencore’s dividend picture is a mixed chart. Forecasts indicate an 8% dividend yield this year. By the time you read this, it may have already been confirmed, with FY results due on February 15.

But dividends have been very erratic in recent years. This is reduced to less than 4% in 2020. And we have experienced several previous cuts in the past decade.

On the positive side, we should see a strong cap with around three times earnings. And in the long term, I expect the metals, minerals, and commodities industries to generate strong cash flows.

China

Glencore makes most of its profits from coal, and many people see it as a dying commodity. The price of coal is not helping either.

But China has been a big contributor to market weakness. Otherwise, the zero-Covid policy affects the country’s economic prospects and reduces the demand for coal and other mineral products.

That’s the turn now. The government has abandoned its dangerous pandemic policy, and opened up the country. And China is now buying coal again. In fact, with Chinese demand for all kinds of commodities expected to grow again, I can see Glencore rising in the next few years.

Contrarians

There’s a lot investors don’t like about Glencore. The cyclical nature of business makes short-termers die. And dividends are unpredictable even by unpredictable sector standards.

Glencore’s share price performance over the past 12 months may not indicate pessimism. But I think the lowest P/E value makes what we see. It seems to me that the market has been more pessimistic in the past.

I mean, who wouldn’t want to buy a stock at a P/E of four? Buying when everyone is valuing the stock so low seems counterintuitive to me.

Cycle

Now, when stocks look this cheap, there is always downside risk. And I see a lot here. Analysts expect earnings to decline in the next few years, lifting the P/E to around 6.5. So we may be past the peak of the earnings cycle.

And although China’s demand should strengthen, much of the world is still facing economic pressure. Then there is coal. Is it wise to be confident about long-term demand?

You may have to be brave enough to buy Glencore shares now. But I think it has solid income for long-term investors.